The 6 D’s of exiting a business

Many business owners are absorbed in the running of their business to the point that they struggle to think in depth about how they will exit their business. A smooth exit is usually a 3-to-5 year process.

Bill Bridges in his book Managing Transitions: Making the Most of Change & tells us that there are 6 D’s of exiting a business:

Death: The death of an owner or key shareholder can create a liquidity event, forcing the business to be sold or reorganized.
Disability: The disability of an owner or key employee can also create a liquidity event, as the business may need to be sold or reorganized to cover the costs of lost income.
Disagreement: Disagreements between owners or partners can also lead to the sale of a business, as the parties may be unable to agree on how to move the business forward.
Debt: Unmanageable debt can also force a business to be sold, as the owners may need to raise cash to repay the debt.
Departure: The departure of a key employee or customer can also lead to the sale of a business, as the business may lose revenue to the point where its viability is in question.
Distraction: A distraction, such as a new business opportunity or personal matter, can also lead an owner to sell their business. Partnerships are particularly vulnerable to this.

Every business has its own unique circumstances which dictate the exit strategy for the business owners. Stories abound of family members finding themselves at the deep end overnight. With reference to point 1 above, do you have a will that is fit for purpose? Regardless of what the circumstances, making the business less dependent on the business owner is generally a step in the direction of both building value into the business and preparing for a smooth exit. This usually means finding and developing key employees and ultimately, if scale allows, building a self-directing management team. The less dependant a business is on the day-to-day involvement of its owner, the greater the value built into the business. Whichever exit strategy you choose – this rule tops the list.

Family business succession is a vast topic in itself. However, the basic principles for an SME in Ireland are simple enough and looks something like this. Generation 2 should expect to be able to buy the business from generation 1 for a fee which is a discounted independently arrived at valuation of the business. This money should be sufficient to fund the retirement needs of generation 1. A point in time whereby control and ownership transition needs to be determined and agreed by all parties. That agreement should recognise that it is unfair to lumber generation 2 with the debt cost of funding generation 1’s retirement unless they are granted full control of the business. Equally, it is neither fair nor reasonable for generation 1 to have generation 2 take on the business at a discounted valuation unless a transitionary stage timeline is agreed where all parties agree on how the business is run. An experienced business advisor will help structure this process and assist all parties to the successful conclusion of the transition.

Where many family members are involved in a business, written family business constitutions provide a framework for decision making and help manage the expectations of family members to either own or are employed in the business. These documents take time to create, but that time pays back in spades in the years after they are put in place. Again, an experienced business advisor will help to put this in place.

Many business owners are working on well past retirement age without a solid exit plan. Executing a graceful exit requires a solid plan and a lot of discipline. The trick is to set the business up for transition without the transition itself becoming a distraction. That means making sure the business continues to run smoothly (and profitably) while also doing what is necessary to sell the business at the right price. Beware paying a large up-front fee to someone who promises to help you sell your business – do some work in advance with a business advisor to be sure you make the right choices.

The 6 D’s of exiting a business

Bill Bridges in his book Managing Transitions: Making the Most of Change & tells us that there are 6 D’s of exiting a business:

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